For almost two years, there appears to be little discussion in bitcoin’s two main public forums other than scalability, an…
For almost two years, there appears to be little discussion in bitcoin’s two main public forums other than scalability, an ancient topic, in bitcoin terms, that has consumed our community at the expense of all else.
There have been many metaphorical casualties, including high principles, such as the right to an open and free public debate in what used to be bitcoin’s main public space, but can bitcoin ever return to a united community? Should it split in two with the market holding a referendum? Can there be a grand compromise or will the question of scalability forever become part of bitcoin’s background?
The use and need for internet money, or e-cash as Friedman called it, was apparent decades ago, leading some to focus on potential ways it could be implemented. One of them was Hal Finney, a developer for PGP Corporation, a crypto activist, a regular poster on the cypherpunks listserv and the first to receive a bitcoin transaction from Nakamoto.
Both Peter Todd and Gregory Maxwell have stated they worked, collaborated or discussed with Hal Finney an implementation of a proof of work based digital currency, presumably RPOW, which Finney stated he tried to create in 2004. It may well be the case that Finney was a mentor in a way as we can see that many of the ideas of both Todd and Maxwell originate from the cryptographer. For example, Finney had a particular dislike of secp256k1 which was recently modified by Maxwell and Pieter Wuille. Likewise, Todd’s idea of replace by fee, which was incorporated into bitcoin this year, also probably originates from Finney, as, I would argue, does segwit and the Lightning Network which, although with some differences, on a high level applies Finney’s vision for bitcoin publicly stated in December 2010:
“Bitcoin itself cannot scale to have every single financial transaction in the world be broadcast to everyone and included in the block chain. There needs to be a secondary level of payment systems which is lighter weight and more efficient. Likewise, the time needed for Bitcoin transactions to finalize will be impractical for medium to large value purchases.
Bitcoin backed banks will solve these problems. They can work like banks did before nationalization of currency. Different banks can have different policies, some more aggressive, some more conservative. Some would be fractional reserve while others may be 100% Bitcoin backed. Interest rates may vary. Cash from some banks may trade at a discount to that from others.
George Selgin has worked out the theory of competitive free banking in detail, and he argues that such a system would be stable, inflation resistant and self-regulating.
I believe this will be the ultimate fate of Bitcoin, to be the "high-powered money" that serves as a reserve currency for banks that issue their own digital cash. Most Bitcoin transactions will occur between banks, to settle net transfers. Bitcoin transactions by private individuals will be as rare as... well, as Bitcoin based purchases are today.”
This general idea, with some modifications, was expressed to Nakamoto himself when he first announced bitcoin by James A. Donald, an apparent pseudonym. The suggestion, which segwit and Lightning implements to a large degree, although with some modifications, is that no one should use bitcoin’s blockchain, except for banks or hubs, with on-chain fees being $1,000 or more per transaction because, they argue, bitcoin cannot scale. Instead, everyone should transact through banks/hubs, with bitcoin’s blockchain an expensive SWIFT like clearing house.
Nakamoto had something very different in mind, seemingly taking into account the vast complexities of the free market and the nature of permissionless mining, he stated:
“At first, most users would run network nodes, but as the network grows beyond a certain point, it would be left more and more to specialists with server farms of specialized hardware. A server farm would only need to have one node on the network and the rest of the LAN connects with that one node.”
Although on the surface this appears to be speculation or a statement of preference, a consideration of long time frames suggests that it is more a statement of inevitable fact as, even if the blocksize is kept at 1MB forever, at some point, perhaps in a century or so, running a node will require up-front capital as data is constantly added to bitcoin’s blockchain.
Visa processed 37 billion transactions in FY2008, or an average of 100 million transactions per day. That many transactions would take 100GB of bandwidth, or the size of 12 DVD or 2 HD quality movies, or about $18 worth of bandwidth at current prices. If the network were to get that big, it would take several years, and by then, sending 2 HD movies over the Internet would probably not seem like a big deal.
The time-frame is important. It has taken bitcoin eight years to reach 1MB blocks. Currently, the network would probably operate finely with 2MB blocks for a couple of years, with scientific studies suggesting that today 4MB is perfectly acceptable, which would probably provide space – if bitcoin continues to attract interest and growth – for another half a decade or more.
To reach Visa levels, considering how widely it is used, we would be thinking in terms of decades and for datacenter type nodes we would be imagining a scenario where all of the world’s transactions are in bitcoin specifically, which is highly improbable as even gold has silver and coper, and, in any event, would be in the next century or later, making it impossible for us to predict with any confidence whether a data center would mean a home server or a mining farm.
Nakamoto, therefore, has so far been right in suggesting that bitcoin can scale and, as 4MB is perfectly acceptable, he will continue to be right for another half a decade, but the supporters of Finney’s vision have decided to not wait until they are proven fully wrong, and instead implement that vision now when technically even they would agree there is no need, at least for another few years.
These two different ways of reaching the same end have divided prominent bitcoin developers, with Gavin Andresen, Mike Hearn, Jeff Garzik and others supporting Nakamoto’s Vision, while the relative newcomers Gregory Maxwell, Peter Todd and others arguing for Finney’s.
There is something to be said about some developers proposing to suddenly completely transforming bitcoin’s payment network, despite it’s clearly laid design, from one which works perfectly fine to a completely unproven new network, but the difficulty in a decentralized system is that there is no judge to make a decision. Although miners, to a large extent, operate as initial arbitrators by the blocks they mine, with the market then approving or over-riding their decision, miners have failed to act for almost two years. Even now that they have to choose between Bitcoin Unlimited and Segwit, some are proposing they may choose neither, a decision that would suggest it is miners who are keeping capacity limited.
According to every poll, including a recent one by CCN, around 80%, consistently over the two years, prefer on-chain scalability. Although these polls are not scientific, the recent experience of ethereum shows that they are strongly indicative with the current price between ETH and ETC largely reflecting polls prior to the fork. The majority of Bitcoin users therefore clearly seem to prefer Nakamoto’s vision, who has proven his abilities by creating a working digital currency, rather than Finney’s, who failed with RPOW, but users are being denied such choice.
The main reason why users are being denied a choice, besides the simple fact that LN does not exist and is a very new system which needs years of operation to gain any trust that it doesn’t have bugs and can’t easily be hacked, is that followers of Finney’s vision probably know LN is inferior to on-chain transactions because you have to in effect open a metaphorical bank account and deposit bitcoin to an LN address which you can no longer access outside of the LN system at least for a period of time, among other things.
Moreover, as LN hubs take fees from miners, on-chain transactions need to become very expensive to compensate for the fees hubs are taking, all of which is paid by end users. As such, space needs to be kept very limited, from the perspective of the 20%, so that ordinary bitcoiners stop using the blockchain and are very much forced to use LN.
However, although the network has been operating at full capacity for almost all of 2016, from observation one can say that there appears to be a ceiling on transaction fees of around 50 cents, with perhaps exceptional spikes during fast price movements. In general, the network seems to self-regulate whereby an increase of fees reduces demand as users wait or substitute bitcoin with other networks as one would expect, but this empirical proof that fees cannot be forced, which would largely disprove the entire concept of replacing bitcoin’s payment network with LN, seems to be largely ignored by the proponents of Finney’s vision.
The much more sensible solution to next century’s problems is many transactions paying a small fee as Nakamoto suggested. The alternative, as Finney’s proponents suggest, is for these many transactions to pay small fees to hubs, plus the fees to miners, with hubs plus bitcoin nodes in servers or data centers eventually, making the exercise of adding an intermediary with its many problems very much confusing.
If Bitcoin Core wished, they could set a flag day as Nakamoto recommended and Ethereum has implemented a number of times with no technical problems and, where there has been general agreement, with no problem whatever. They could also adopt BU’s method of decentralized decision making regarding on-chain scalability or BU could incorporate segwit without the discount, but neither of those options is likely as that would make LN optional.
A further difficulty in reaching a compromise is the fact that bitcoin’s community has already hardforked with miners, developers and ordinary users divided while businesses largely seem to prefer an on-chain increase. Uniting the community once more would be a difficult if at all possible task as Michael Marquardt continues a North Korean grip on r/bitcoin which indicates Finny’s vision has largely lost the debate and user’s support as otherwise there would be no need for such drastic actions.
Considering that this debate began as soon as bitcoin was proposed, it is probable that all parties involved have a genuine difference of opinion, with both sides of the argument having their own merits. As such, it may well be the case that this debate never actually ends as whichever path is chosen there will still be arguments to be made regarding scalability as bitcoin’s adoption continues to grow.
Eventually, we’ll probably reach some sort of understanding, but the continued delay towards a decision has probably set bitcoin back two or three years as the community consumes its energy on endlessly repeating the same arguments, instead of working towards implementing the many opportunities bitcoin offers.
For that reason, it is highly unfortunate that a compromise was not reached and even now does not seem possible, but in the end, bitcoin continues to work and capture the world’s imagination, with far more aspects to this digital currency than the question of scalability which will be addressed whether through hubs or Bitcoin Unlimited, eventually.
Disclaimer: The views expressed in the article are solely that of the author and do not represent those of, nor should they be attributed to CCN.
Featured image from Shutterstock.